The EU Just Did the Big Banks a Massive Favour

The EU Just Did the Big Banks a Massive Favor

“Testimony to the iron grip the financial industry’s lobby still exerts on governments and legislators.”

By Don Quijones, Spain, UK, & Mexico, editor at Wolf Street

The European Union’s executive arm, the European Commission, made a lot of bank executives very happy this Tuesday by abandoning its multi-year pledge to break up too-big-to-fail lenders. Despite the huge risk they still pose to Europe’s rickety financial system, big European banks like Deutsche Bank, BNP Paribas, ING, and Santander can breathe a large sigh of relief this week in the knowledge that they will not have to split their retail units from their riskier investment banking arms.

Breaking up the banks would remove much of the risk from today’s government-backed banks, such as derivatives and other instruments that were heavily involved in the Financial Crisis. Without these hedge-fund and investment-banking activities, even large banks would be smaller, less interconnected, and could be allowed to fail without jeopardizing the entire global financial system.

According to the Commission, such a drastic measure is no longer necessary since the main rationale behind ring-fencing core banking services from investment banking divisions — i.e. to make Europe’s financial system less disaster prone — has “already been addressed by other regulatory measures in the banking sector.” That’s right: Europe’s banking system is already safe, stable and secure. Bloomberg:

The proposal, which hasn’t progressed since 2015, was made to boost financial stability and safeguard taxpayers from the risk of future bailouts. While the commission and the conservative lead lawmaker on the file said this goal had been achieved by other laws on supervision and resolution, the socialist lawmakers backing the “Bank Structural Reform” bill disagreed.

“The too-big-to-fail financial behemoths still pose a danger to financial stability, to the taxpayer and to clients,” German Social Democrat Jakob von Weizsaecker said in a statement. “The withdrawal of the BSR file marks an unfortunate turning point in the European agenda on regulating large banks.”

The withdrawal of the proposal is a long-sought victory for the banking industry, which lobbied hard against its adoption in Brussels and said the legislation would damage the ability of lenders to help the economy to grow.

It would also damage the ability of lenders to grow; in fact it would make them smaller. And that is not in the big banks’ interests, nor that of the ECB, which hopes to breath life into a new generation of trans-European super banks by weeding out small banks to cut competition.

As Christian Stiefmueller, senior policy adviser at Finance Watch in Brussels, points out, the demise of the EU’s ring-fencing policy “is testimony to the iron grip the financial industry’s lobby still exerts on governments and legislators.” It’s the reason why one of the most obvious causes of the biggest financial crisis of our lives — the co-mingling of high-risk financial instruments with plain vanilla commercial banking assets — remains completely unaddressed, not only in Europe but just about everywhere else on Planet Earth.

There was the briefest of moments earlier this year when it seemed that the Trump administration was actually considering bucking this trend. In April, White House economic adviser and former Goldman Sachs president Gary Cohn shocked the world when he said he was largely in favor of splitting commercial banks from everything else, in a return of sorts to the days of the Glass-Steagall Act.

The news that Cohn and Trump were considering reinstating Glass Steagall triggered a flurry of excited speculation that lasted a matter of weeks before Trump’s Treasury Secretary Steven Mnuchin brought everyone back to reality with an Orwellian thump. During testimony to the Senate banking committee in May, Mnuchin told Sen. Elizabeth Warren that separating investment and commercial banks “would have a very significant problem on financial markets, on the economy, on liquidity.” And that was the end of that.

One country that has gone a lot further than just about anywhere else in separating investment banking from commercial banking is the UK, where the Vickers Report of 2011 recommended that banks ring fence their investment banking activities (derivatives, debt and equity underwriting) from high street bank operations (mortgages, retail and small business loans and deposits, overdrafts…).

To make sure the banks’ operations were not unduly harmed in the process, the UK government gave them until 2019 — a total of eight years — to implement the reforms. But even that may be too soon, with some banks hoping that the financial fallout caused by Brexit might push ring-fencing back even longer.

For the moment the Bank of England is sticking to its guns, insisting that all UK banks must separate their business operations by Jan 1, 2019, with the bulk of restructuring activities planned from now to mid-2018. Let’s hope it stays that way. By Don Quijones.